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Stockwatch- China Sky Chemical Fibre Co., Ltd (Singapore) $1.07

2005 Annual Report:

COMPANY OVERVIEW

Established in 2002, the China Sky Group is a manufacturer and supplier of chemical fi bres, mainly quality high-end nylon fibres, to the textile and garment manufacturers in Fujian and the surrounding Zhejiang, Jiangsu and Guangdong provinces in the People’s Republic of China (“PRC”).

Marketed under the “Tianyu” trademark and brand name, the Group’s nylon fi bres have a wide and diverse range of commercial applications. They can be found in high-end sportswear, casual wear, shoes, bags, travel appliances and
in consumer durables like upholstery and nylon webbings used in the home furnishing industry.

The Group’s principal product lines are the nylon Full Drawn Yarn (“FDY”) and the nylon High Oriented Yarn (“HOY”).
Having commenced the commercial production of the nylon (lustrous) FDY in FY2005, it has plans to develop another four new product lines during 2006 and 2007.

The Group operates a 27,000 square metre production facility in Quanzhou City, Fujian province, which is strategically located amongst clusters of textile manufacturers in the region. As at the end of FY2005, the Group operated seven units of automated production equipment in commercial production with a total production capacity of approximately 39,000 metric tonnes of nylon yarns per annum.

Competitive Strengths

The performance of the past year is the result of successful and careful execution of growth strategies by a dedicated team, driven by a strong vision of China Sky and of the nylon industry in China.

Instrumental to the Group’s success are several factors, including the strategic location of our facilities which keep us close to our customers while reducing transportation costs and delivery times. The strong management team is led by the Group CEO and Executive Director, Huang Zhong Xuan, and Executive Director, Song Jian Sheng, who heads the Research and Development Team with his expertise in chemical fi bres in the PRC. Both men have more than 20 years of industry experience between them. The Research and Development Team has also been infl uential in identifying new commercial products, developing and improving production techniques and processes to raise the overall efficiency.

Having established a track record for producing quality high-end chemical and nylon fi bres, the Group’s “Tianyu” trademark and brand name is synonymous with quality and good personalised after-sales service support. The Group was a recipient of a “Gold Medal of Quality New Chemical Fibre Product of China” from the China Chemical Fibre Association in 2004.
To further improve our work processes, we have invited Dr Yu Yang Ming, Director of the Chinese Institute of Strategic Planning, to be stationed at our facilities for one month. Dr Yu will provide his assessment and recommendations to help improve our operation workflow procedures.

Expansion Plans and Strategies For Growth

The Group is confident about the potential of the nylon fibre business in the PRC as growing affl uence and better living standards will spur demand for high-quality nylon via use for
higher-end apparel. As PRC textile manufacturers improve their technologies in dyeing, fabric-treatment and other pre-production services, these improvements will also stimulate the demand for chemical fibres.

There are currently about 50 to 60 domestic competitors with capacity of 5,000 to 10,000 tonnes per year each; many of them producing lower-quality nylon. Nylon consumption in the PRC reached an estimated 1.0 to 1.2 million tonnes, with imports accounting for a third of PRC nylon usage. Such is the demand that nylon producers such as China Sky have been able to pass on increases in raw material prices to customers.

With the European Union and the USA increasing the PRC export quotas for garments after rounds of talks in the past year, sentiment in the industry has greatly improved and has led to
higher demand for our yarns.

China Sky currently commands an estimated 3% to 4% share of the PRC market for nylon fibre. The Group intends to raise this to 6% to 7% in FY2006 and further to 10% by the end of
FY2007. The capacity expansion, which was outlined in its IPO prospectus, had begun in FY2005 with the increase in machinery or orders for equipment. Production capacity will increase from 39,000 tonnes in FY2005 to 72,000 tonnes by installing two new lines (six units of production equipment) before the second quarter of FY2006, at least two month ahead of the July 2006 deadline we had previously outlined in the prospectus. This expansion will
involve capital expenditure of about RMB 100 million and is being met by IPO proceeds or internal resources, without having to incur borrowings.

Beyond capacity expansion, the Group is also seeking to offer higher-value products. Out of total new capacity of 33,000 tonnes earmarked for FY2006, 30,000 tonnes will comprise FDY and the balance 3,000 tonnes HOY.

The Group plans to produce two new products, Nylon Super Resilient Full Drawn Yarn (“SR-FDY” which has extra resilient capability while maintaining its softness, making it suitable for
outdoor sports clothing) and Nylon Super Resilient High Oriented Yarn (“SR HOY” which has same qualities as SR-FDY but is of medium strength with stronger stretchability). When these
production capabilities are in place, China Sky will be the first in China, and only the second such factory in the world, to offer such quality products.

China Sky is also on the lookout for growth opportunities beyond organic means. The textile sector has received support from the PRC Government as it seeks to develop rural areas and increase employment rates. However, China Sky remains focused on its core competency within the nylon sector as it believes it will continue to have a competitive edge in this sector.

OUTLOOK AND FORWARD STRATEGY

The Board is confident of the outlook for the nylon industry in China. To tap the opportunities in this sector, the Group has embarked on a two-pronged strategy.

The first is to increase its share of nylon fi bre market in China from 3% to 4% in 2005, to 10% in 2007, starting with an increase in production capacity from 39,000 tonnes in 2005 to 2,000 tonnes by the second quarter of 2006.

The second is to offer products of higher-value. China Sky is moving further up the value chain to produce Nylon Super Resilient Full Drawn Yarn (“SR-FDY”) and Nylon Super Resilient High Oriented Yarn (“SR HOY”). When these production capabilities are in place, China Sky will be the fi rst in the PRC and only the second such factory in the world to offer such quality products.

Over the longer term, we are seeking to grow beyond organic means and we are on the lookout for suitable M&A opportunities.

2006 1H Result Announcement:

Outlook commentaries

The demand for nylon fibre remained strong in second quarter of FY2006 mainly due to the growing demand for high nylon content products in the domestic PRC market and exports to overseas markets.

In second quarter of FY2006, we have completed the installation of six new production units,
increasing our production capacity from the current 39,000 tonnes to 77,000 tonnes of nylon per year. Commercial production commenced towards the end of the second quarter of FY2006 and is expected to contribute to our financial performance from the second half of FY2006 onwards.

We have commenced the initial groundwork on the construction of a new factory building at our existing location which will be used to house our new production facility to produce our two new products: ATY and DTY. ATY and DTY have a wide range of applications in textile and fabric manufacturing, and are suitable for higher end and higher value apparels that require very high tensile strength and resilience. The planned facility will comprise two production lines with an expected total capacity of 16,000 tonnes per annum and is targeted to commence operations by the end of FY2006.

We are also in the evaluation and design stages of a proposed new production facility for the
production of another two new products, namely SR-FDY and SR-HOY. The construction of the new factory, which will be sited at our existing location, is targeted to commence by the end of FY2006 or the early part of FY2007.

We are confident of our performance for the rest of FY2006 and we expect the growth momentum achieved in 2Q FY2006 to continue in view of the growing demand for high nylon
content products in the domestic PRC market and exports to overseas markets. Apart from
growing our business operations organically, we are constantly on the lookout for suitable
companies to acquire, which would complement our business strategies and to bring additionalvalue to our shareholders.

Production for Q12006 was affected as the plant has to be shut down for two weeks to facilitate the installation of the newly expanded production equipment and facilities which were expected to enter commercial production towards the end of Q2. Consequently, revenue and profitability has been affected as compared to Q1 2006.

posted by gsg @ 10:16 PM